Gold's hopes from the Fed are hijacked by soaring Treasury yields

GOLD prices were buoyant most of the week in anticipation of the outcome of the US Federal Open Market Committee meeting mid-week, which most analysts were expecting to be dovish and healthy for precious metals. The Fed was expected to reiterate support for its easy money policy and reassure markets recovering from the worst effects of Covid-19. Some analysts had also raised the possibility that the Fed may purchase more longer-dated debt.

Bullion investors were not disappointed when the Fed pledged to keep near-zero interest rates until 2023. Gold prices hit a two-week high after the Fed statement, which also implied that the Fed is not overtly concerned with inflation going above 2 per cent and would maintain its accommodative stance.

Bullion prices moved higher and rose over one per cent mid-week. The US dollar, which had been slowly appreciating against its major peers, slipped. The yield on the benchmark US Treasury note, whose surge has roiled markets in recent weeks, also initially fell back.

Gold's optimism was however short-lived. It dawned on investors that the Fed did not announce any action to cap rising yields. Treasury yields soon rose to the highest in 14 months to touch a high of 1.75 per cent at the time of writing. Bullion prices could only rise up to US$1,754 an ounce before levelling off to US$1,732 at press time. The dollar too gained on the jump in yields.

Gold's price recovery is again threatened by the rise in US Treasury yields, which are generally expected to continue as more funds sell bonds which may eventually move the 10-year note yields above 2 per cent.

Technical analysis for Comex April Gold Futures (GCJ21)

Recent price actions of gold reveal that bears are still able to hold their ground at key resistance of US$1,760. After touching a high above US$2,000 an ounce in August last year, daily technical indicators since then have reflected bearish dominance, further reinforced in the first week of January 2021 when gold prices broke below US$1,900. Bears have further strengthened their hold since the failure of the yellow metal to trade above the pivot of US$1,860. Prices drifted lower to touch a low of US$1,673 after breaking through the psychological US$1,700 earlier this month.

Bearish gold traders are currently focused on the next minor support for the benchmark GC April contract situated at the US$1,720 an ounce area. A breach below would raise concerns for gold bulls, and long liquidation and fresh selling could press the yellow metal back below US$1,700. The US$1,700 level for gold is an important psychological level as it signifies almost 60 per cent of retracement of the bull run of gold from the March 2020 low of US$1,450 to the August high of US$2,070.

A significant collapse of prices from the recent low of US$1,673 would take prices to the next support level of US$1,660. A breach below the level would force another round of long liquidation which could carry prices to US$1,500 in the absence of any other supporting factors.

Immediate resistance below the US$2,000 level is at US$1,760, US$1,860, followed by US$1,900.

• The writer is senior manager, commodities, Phillip Futures